Member Sign In

You are being directed to ZacksTrade, a division of LBMZ Securities and licensed broker-dealer. ZacksTrade and Zacks.com are separate companies. The web link between the two companies is not a solicitation or offer to invest in a particular security or type of security. ZacksTrade does not endorse or adopt any particular investment strategy, any analyst opinion/rating/report or any approach to evaluating indiv idual securities.

If you wish to go to ZacksTrade, click OK. If you do not, click Cancel.

Fiscal Cliff Resolution for Christmas?

‘Fiscal Cliff’ negotiators have reportedly made meaningful progress over the weekend as the last full week of trading before the Christmas holidays get underway. While we are a bit light on the data front today, but the rest of this week brings a number of top-tier economic and earnings reports. But the focus will remain on the ‘Fiscal Cliff’ question.

Housing is a major component of this week’s data, with Tuesday bringing the December homebuilder sentiment index, Wednesday the November Housing Starts numbers, and Existing Home sales data on Thursday. The expectation is for Housing Starts to pullback modestly from the prior month’s level, while the homebuilder sentiment index is expected to be essentially unchanged from the month earlier level.

Other major reports this week include the November Personal Income & Outlays and Durable Goods reports on Friday and the final read on third quarter GDP on Thursday. Expectations for GDP growth in the fourth quarter have been steadily coming down in recent weeks and currently stand a little under 1.5%, with the growth pace not much better in the first quarter of 2013 either.

Expectations for the back half of 2013 are for much higher growth pace, though it’s hard to envision how the momentum will shift. A Wall Street Journal report today quoting a Dow Jones Newswires survey shows major Wall Street firms expecting treasury bond yields to rise in 2013. Most prominent among these major brokerage firms are the 21 primary dealers, who underwrite treasury bond sales and deal directly with the Fed.

The median 10-year Treasury bond yield forecast for the primary dealers is for a roughly 50 basis point rise by the end of 2013 – from the roughly 1.71% as of Friday’s close 2.25% by the end of the year. Yield on the same security was at 1.88% at the end of 2011.

This makes perfect sense, for two reasons. First, yields have been so low for so long that the only direction they should be moving going forward is – higher. Second, if anyone in the market has a good understanding of the Treasury bond market, it is most likely the firms that underwrite the securities – meaning the primary dealers.

The only problem is that the primary dealers had come out with similar forecasts in 2011 and 2010, but unfortunately things turned out differently. Maybe the third time is the charm. But it’s not easy for anyone, even the primary dealers, to ‘fight the Fed.’ With the Fed committed to adding more than a $1 trillion worth of treasury and mortgage bonds to its balance sheet in 2013, it is perhaps reasonable to be skeptical of Wall Street’s treasury yield forecast for 2013 as well.

These economic growth questions have a direct bearing on the corporate earnings outlook for 2013 as well. The fourth quarter earnings season gets underway this week with Oracle’s (ORCL - Free Report) quarterly report after the close on Tuesday, though we are still a few weeks away from the ‘unofficial’ start of the earnings cycle with Alcoa’s (AA) release on January 8th. Other major reports this week include FedEx (FDX - Free Report) , Discover Financial (DFS - Free Report) and Nike (NKE - Free Report) .

Earnings expectations for the fourth quarter have been steadily coming down over the last three months, with total earnings expected to be up 1.2% from the same period last year. This is a sharp drop from the roughly 7% earnings growth expected just three months ago. But even as expectations for the fourth quarter have come down, we haven’t seen much downward adjustment to expectations for 2013, which still shows earnings growth rate of more than 10%.

The same thinking that is looking for the economy and Treasury yields to start rising in the second half of 2013 appear to also at play in looking for 10%-plus earnings growth. Maybe it’s just me, but I find it hard to buy into these expectations.

Resources

Client Support

Follow Us

Zacks Research is Reported On:

Yahoo

MSN

Marketwatch

Nasdaq

Forbes

Investors.com

Morningstar

Zacks Investment Research is an A+ Rated BBB Accredited Business.

Copyright 2016 Zacks Investment Research

At the center of everything we do is a strong commitment to independent research and sharing its profitable discoveries with investors. This dedication to giving investors a trading advantage led to the creation of our proven Zacks Rank stock-rating system. Since 1988 it has nearly tripled the S&P 500 with an average gain of +26% per year. These returns cover a period from 1988-2015 and were examined and attested by Baker Tilly Virchow Krause, LLP, an independent accounting firm.

Visit performance for information about the performance numbers displayed above.